China Can't Afford to Let Property Crash
The industry is too important to the economy for the government to squeeze credit to the point where it causes defaults.
Build it, and they will keep coming.
Photographer: AFP/Getty Images
As China’s economy picks up after the pandemic, the last thing you might expect is a renewed credit squeeze in the real estate industry. So the imposition of leverage thresholds for developers has come as a surprise, weighing on shares of highly indebted companies from China Evergrande Group to Greenland Holdings Corp. The concerns may be overstated.
China's widely circulated though unofficial “three red lines” policy sets limits on bank borrowings: a 70% ceiling on developers' debt-to-asset ratio after excluding advance receipts; a 100% cap on the net debt-to-equity ratio; and a requirement that short-term borrowings don't exceed cash reserves, according to S&P Global Ratings. UBS Group AG lists nine publicly traded companies that would breach the three thresholds.